The clearing of financial transactions as between different banking institutions has, for many years, been carried out through the medium of an independent clearing house. Thus, a banking institution, the collecting banking institution in this instance, that receives a request (in any one of a variety of different forms) to credit a particular client's (payee's) bank account with funds originating from a payer that is a client of a different banking institution, the paying banking institution in this instance, will initiate collection of the funds by directing the relevant information to a clearing house.
The clearing house will, in turn, direct the information to the paying banking institution that will either accept or decline the transaction. If the transaction is accepted, the clearing house notifies the collecting banking institution to this effect and the transaction becomes cleared with the payees bank account at the paying banking institution being debited with the relevant amount and the payee's bank account at the collecting banking institution being credited with the relevant amount.
This system operates effectively and it has become accepted that such a settlement procedure is a necessary part of all transactions between different banking institutions. However, the procedure is costly in that the clearing house charges for their services and the charges may be deleterious to the business of a banking institution, particularly a smaller banking institution.